The next recession is always coming—and the next recovery, and so forth. Like the seasons and the tides, the economy runs in cycles. But after reviewing all the evidence, we don’t think it will arrive any time soon.
LPL Financial’s Research Department put together a useful summary on this issue. This is the short version, with other thoughts on the topic.
The first thing to understand is that two of the most popular fears about the cause of recessions are unfounded. The growth part of the cycle does not end because of old age. And the start of interest rate increases usually marks the midpoint, not the end, of the growth cycle.
So what are the causes of recession? LPL Financial believes that imbalances are the culprit. “In a healthy economy, there is a balance of responsible levels of borrowing, confidence, and spending.” So recessions are likely to occur after we see over-borrowing, over-spending, and overconfidence.
LPL Research has actually constructed numerical indicators to test for these three “overs” and calculated back through history. But it doesn’t take a rocket scientist to know that confidence is poor and spending has been weak. Borrowing has not gotten anywhere close to danger levels, either. Their conclusion is that the probability of a recession in the near future is unlikely.
The LPL “Over” Index agrees with another set of recession warnings we monitor, the Four Horsemen: home building, auto sales, business investment, and inventories. When one or more of these areas becomes overheated, trouble may ensue. All four are all at fairly subdued levels, or close to long term averages—not overheated.
There is one other indicator which may be both instructive and profitable. The price of raw materials usually peaks at around the same time the economy does, near the onset of recession. Crude oil, iron ore, copper and other natural resources tend to rise during expansions. But the prices for these goods have been falling for more than four years. We expect to see a sustained move up prior to the next recession.
We look at the facts and act accordingly, after considering all the pertinent information we can find. Our conclusion is that optimism is warranted. We will continue to follow our principles: search for bargains, “own the orchard for the fruit crop,” and avoid stampedes in the markets.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Investing involves risk including loss of principal.